Business context and reporting period
ARK Restaurants Corp. operates restaurants, bars, fast-food concepts and catering businesses across the United States. This 10-K covers the fiscal year ended October 3, 2015; fiscal 2015 had 53 weeks versus 52 weeks in fiscal 2014. The company reported one operating segment and operated 22 restaurants and bars and 19 fast-food concepts at year-end.
Financial performance and liquidity
| Metric | Fiscal 2015 | Fiscal 2014 |
|---|---|---|
| Total revenue | $145.9 million | $139.4 million |
| Operating income | $8.9 million | $7.6 million |
| Net income attributable to ARK | $5.4 million | $4.9 million |
| Diluted EPS | $1.54 | $1.43 |
| Operating cash flow | $11.3 million | $11.9 million |
| Cash and cash equivalents, year-end | $9.7 million | $8.7 million |
| Notes payable, year-end | $5.5 million | $7.3 million |
| Working capital | $129,000 | ($1.3 million) |
Revenue grew 4.7%, operating income 17.2%, and net income attributable to ARK 9.7%. Operating margin was approximately 6.1% versus 5.5%; diluted EPS increased about 7.7%. Food and beverage cost of sales was 27.0% of revenue, up from 26.6%, while payroll was 32.2% versus 31.9%. The company paid $1.00 per share in dividends during the year. Cash used in investing was $3.7 million and cash used in financing was $6.6 million.
Material changes versus the prior period
- Company-wide same-store food and beverage sales increased 0.9%. Results varied by market: New York +5.6%, Washington, D.C. +2.3%, Atlantic City +10.7%, Las Vegas -0.8%, Connecticut -3.1%, and Florida -6.8%.
- The Dania Beach Rustic Inn contributed $1.8 million more operating income year over year. The new Jupiter Rustic Inn incurred approximately $1.1 million in operating losses, including $841,000 of pre-opening and early operating losses.
- Stronger New York and Washington performance, favorable Northeast weather and catering revenue supported results; Florida casino competition and reduced casino complimentary usage were offsets.
- Fiscal 2015 included a full-year contribution from the Dania Beach acquisition and the opening of the Jupiter Rustic Inn and Bryant Park kiosk. The 53rd week also affects comparability.
Outlook, risks and unusual items
Management provided no specific earnings or revenue guidance. It said it had no significant projects currently committed to, may pursue opportunities depending on financing and other factors, and expects cash balances and operating cash flow to meet liquidity and capital-spending needs for at least 12 months. Management intended to continue quarterly dividends of $0.25 per share, subject to Board discretion.
Key risks include seasonality and weather sensitivity, minimum-wage and other labor-cost increases, food-cost volatility, dependence on discretionary consumer spending and casino traffic, intense competition, geographic concentration, dependence on key personnel, and the costs and execution risks of opening new restaurants. The company also disclosed cyber and data-security risks, licensing and regulatory requirements, and ordinary-course accident, workers’ compensation and employment litigation; management did not expect the disclosed litigation to have a material adverse effect.
After year-end, ARK acquired Shuckers in Jensen Beach, Florida, for $5.65 million plus inventory, financed with a $5.0 million bank loan and operating cash. It also entered into a secured revolving facility of up to $10 million, bearing interest at LIBOR plus 3.5% and expiring October 21, 2017. The V-Bar lease expired in November 2015 and the location was vacated without a material charge. The company corrected an immaterial gift-card-liability error; the filing describes a $224,000 overstatement and a $161,000 after-tax, $0.05-per-share effect for fiscal 2015. No impairment charges were recorded in either year. The independent auditor issued an unqualified opinion on the financial statements; management concluded disclosure controls and internal control over financial reporting were effective, with no auditor attestation on internal controls.
Important facts for investors to verify
- How much of the reported growth reflects the extra fiscal week and acquisitions, and whether comparable-store sales and margins sustain improvement.
- Whether the Jupiter Rustic Inn’s start-up losses abate and whether Florida sales recover amid casino competition and lower complimentary usage.
- Post-year-end debt balances, borrowing under the new facilities, covenant compliance and the effect of additional interest costs.
- Ability to fund lease commitments, capital spending and the quarterly dividend while working capital remains narrow.
- Progress and economics of the Shuckers acquisition, the Meadowlands investment and loan, and any related contingent opportunities.